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Webinar: The US Foreign Account Tax Compliance Act (FATCA)

AUDIO: An audio replay of the Webinar. Click on the 'Play' button to listen.

The US Foreign Account Tax Compliance Act (FATCA) is rapidly becoming one of the biggest concerns for fund managers all over the world. The rules require foreign financial institutions (FFIs) to report data on US clients or accountholders to the Internal Revenue Service (IRS) directly or via their own national regulators as part of a US clampdown on the number of Americans not paying their income tax. FATCA has been subject to serious delays, having been unwittingly complicated by Intergovernmental Agreements (IGAs), which US Treasury has been signing with third countries to help ensure cooperation on FATCA. FATCA is also proving to be an operational headache for fund managers already grappling with a plethora of other regulations.

Here is a summary of the key points:

• FATCA is a highly complex exercise, and adds to the regulatory burden already facing managers, who are already obliged to submit Form PFs, CPO-PQRs, Annex IV reports courtesy of AIFMD and Open Protocol reports. Firms need to develop procedures urgently to deal with FATCA.

• The punishments for non-compliance are significant. Firms will be subject to a 30% withholding tax on all US source payments for non-compliance. The cost of non-compliance is far higher than the cost of implementing FATCA. If there is a recalcitrant investor, firms will need to kick them out of the fund.

• It is essential to do due diligence on underlying investors. It is advised managers obtain self-certification, KYC or AML documents from investors. However, a W9 or passport is required for Americans to confirm they are Americans. The due diligence can be problematic. There are a number of tests managers need to do to assess whether their clients are US persons. This is not straightforward. If an individual has ever held a green card and not revoked it or has American parentage, for example, that person could be defined as an American, and impacted by FATCA.

• Investors have not yet been prompted by FFIs to provide information. Managers need to reconfigure their operations to deal with FATCA, and update their compliance manuals and technology to help facilitate FATCA reporting. It is advised to use an external vendor to do this as other FATCA-esque reporting obligations in different jurisdictions will emerge. There are a number of service providers including fund administrators and technology vendors offering solutions to help managers with their FATCA obligations.

• It is essential firms monitor the work of these providers helping with their FATCA reporting. Firms cannot outsource responsibility.

• Not many firms have applied for their GIINs. A number of firms are not in a position to register. Many firms are still waiting to figure out what FATCA means. The understanding of FATCA in the US and Europe is broadly high, although this is less so in Asia. Larger firms seem to be up to grips with FATCA.

• IGAs are becoming more commonplace. There are 25 signed IGAs. Many of the fund domiciles – Channel Islands, Bermuda and Cayman Islands have signed IGAs although a number are still being negotiated. The IGAs have a number of differences between them. IGAs are reciprocal and it could be a challenge for US financial institutions to supply data to other countries requesting information.

• If an FFI operates in multiple jurisdictions which have signed different IGAs, then that FFI will need to comply with each of those jurisdiction’s IGA.

• If a country has not signed an IGA, it is advised that FFIs operating in that country comply with full FATCA.

• Global FATCA will emerge. The UK (with crown dependencies), China and OECD are all developing their own FATCA equivalents.